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From income taxes to payroll taxes: What to know about Cuomo's plan

New York Budget Director Robert Mujica detailed a proposal by the Cuomo administration to move from an income-tax system to a payroll-tax system during a news conference at the state Capitol on Monday, Feb. 12, 2018.

New York State Budget Director Robert Mujica details a proposal to shift income taxes to payroll taxes in Gov. Andrew Cuomo's budget plan on Monday, Feb. 12, 2018.(Photo: Governor's office)

ALBANY - The Cuomo administration on Monday proposed a new payroll tax system and a charitable contribution program to shield New Yorkers who will be limited in how much they can deduct in state and local taxes.

Cuomo has railed against the deduction cap, saying it unfairly targets high-tax states like New York and hurts the state's tax base. New York and neighboring states are also planning to sue over the federal law.

Budget Director Robert Mujica said Cuomo is adding to his budget proposal an "employer compensation expense tax" that would be optional for employers and employees as a way to work around the federal-deduction limit.

Mujica insisted businesses and employees would be kept whole if the changes are put into law by the state Legislature as part of the state budget for the fiscal year that starts April 1.

"There's no increase for the employer and no increase for the employee," he said.

What is proposed?

Secondly, Cuomo's office proposed two new charitable contribution programs, one for health care and one for education.

People could contribute money to pay for the state services, and the charitable contributions would be tax-deductible.

So taxpayers who itemize their deductions would be able to claim the new contributions on their state and local taxes — a way to get around the $10,000 deduction cap.

"While the federal government takes direct aim at the economic heart of New York, with this new legislation we are taking action to protect hardworking New Yorkers from this attack from Washington," Cuomo said in a statement.

The charitable contribution program would also be available for schools and municipalities who want to create their own locally based initiative. Several states, including California, are considering similar plans.

The proposal would also provide a state tax credit equal to 85 percent of the charitable donation when people file their taxes. They would also be credited back what they contributed, so their total local tax bill would be unchanged.

What about employees?

Mujica said the plan would be revenue-neutral for the state, but help keep wealthy New Yorkers who would be most affected by the deduction cap from leaving the state, which would be a hit to the state's tax coffers.

"Federal law prohibits deductions for individuals. However, they still allow employer-side taxes, taxes on payroll, to remain deductible," Mujica said.

"So to maximize deductibility, we're going to provide options for employers to be able to protect their employees from this tax increase."

Employers could opt in by Oct. 1 to participate.

Businesses and Republicans gave the plan a cool reception, saying they are concerned about placing more costs or administrative work on companies.

"Employers will have to carefully consider the shift of tax liability and administrative costs when evaluating this election," said Heather Briccetti, president of the state Business Council.

"The creation of a charitable contribution mechanism is more palatable to the state’s business community, but its value will depend on IRS deductibility."

Indeed, it is unclear whether the IRS would even allow any of what Cuomo is proposing.

Senate Majority Leader John Flanagan, R-Suffolk County, questioned whether the new plan would add more costs and taxes on companies and New Yorkers.

"This year's state budget must prioritize making New York more affordable for taxpayers and their families," he said in a statement.

What would change?

Under the payroll-tax plan, employers would be subjected to a 5 percent tax on all annual payroll expenses in excess of $40,000 per employee.

The program is phased in over three years, and Mujica said wages would not be impacted, in part, because of a tax credit for employees and employers.

Overall, the proposal would give employers the opportunity to reduce their employees' federal taxes, state officials said, to make up for the loss of the state and local tax deduction cap.

"So again, by phasing it in, you could protect all of the taxpayers and also prevent any impact on any wages," he said. "Take-home pay would stay exactly the same."

How many businesses would want to consider the overhaul is unclear, and Cuomo has been criticized for his aggressive attack of the federal tax bill approved by Republicans in Washington.

Cuomo, a potential presidential candidate in 2020 who is seeking re-election this fall, has started a public campaign to call on Congress to repeal the provision, saying it will lead to a $14 billion hit on New Yorkers.

The $14 billion figure is the amount above $10,000 in state and local taxes — which includes property taxes — that New Yorkers will no longer be able to claim starting with their 2018 taxes next year, his office said.

In New York, the average so-called SALT deduction in 2015 was about $22,000, according to the state Comptroller's Office.

But critics said Cuomo isn't taking into account the savings that most New Yorkers will receive under the federal law, such as lower income-tax rates, a near doubling of the standard deduction and a higher child tax credit.

"Just because you used to have $10,000 in SALT deductions doesn’t necessarily mean your taxes will rise," said E.J. McMahon, founder of the Empire Center, a fiscally conservative group in Albany.